We construct multi-currency models with stochastic volatility and correlated stochastic interest rates with a full matrix of correlations. We frst deal with a foreign exchange (FX) model of Heston-type, in which the domestic and foreign interest rates are generated by the short-rate process of...

In this note, we correct the formula given in Ref. [3] for European call and put option under Merton's model of the short rate. We give a probabilistic derivation making use of the “change of numeraire” technique which is simpler and more standard.

This paper considers the optimal asset allocation strategy for bank with stochastic interest rates when there are three types of asset: Bank account, loans and securities. The asset allocation problem is to maximize the expected utility from terminal wealth of a bank's shareholders over a finite...

The aim of the paper is to develop pricing formulas for long term European type Asian options written on the exchange rate in a two currency economy. The exchange rate as well as the foreign and domestic zero coupon bond prices are assumed to follow geometric Brownian motions. <p>The emphasis is...</p>

This study employs correlation relationships to measure the strength of trade-offs between business and financial risks as a representative of the strategic capital adjustment process. Under different business risk measures based on varying lengths of historical farm income data, results suggest...

This study measures the deposit insurance premium under stochastic interest rates for Taiwan's banks by applying the two-step maximum likelihood estimation method. The estimation results suggest that the current premiums—charging 5, 5.5, and 6 basis points per dollar of insured deposits—are...

Models that are based on mean-variance analysis seek portfolio weights to minimise the variance of the portfolio for a given level of return. The portfolio variance is measured using a covariance matrix that represents the volatility and correlation of asset returns. However these matrices are...

Control variates are often used to reduce variability in Monte Carlo estimates and their effectiveness is traditionally measured by the so-called speed-up factor. The main objective of this paper is to demonstrate that a control variate can also be applied to reduce the bias stemming from the...

We will generalize the Black-Scholes option pricing formula by incorporating stochastic interest rates. Although the existing literature has obtained some formulae for stock options under stochastic interest rates, the closed-form solutions have been known only under the Gaussian (Merton type)...

We study investment problems in a continuous-time setting and conclude that the proper control variables are elasticities to the traded assets or, in the case of stochastic interest rates, (factor) durations. This formulation of a portfolio problem allows us to solve the problems in a kind of...